LSL Property Services : Mar 16 Scottish Buy-to-Let Index

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Under embargo until 00:01 Wednesday 27th April 2016 March 2016

Biggest monthly drop in Scottish rents on record

• Average Scottish rents fall for the first time in six months, down 0.7% month-on-month in March
• Takes the average rent in Scotland to a ten-month low of £544, £4 lower than in February
• Edinburgh is the only region to experience a rent rise in March, reaching a new peak of £645
• Annual change slows to 1.1% in March - the slowest in over a year, since February 2015
• But dip doesn't help tenants pay down late rent, with tenant arrears rising to 11.3% of all rent due

March saw the sharpest month-on-month fall in Scottish rents on record, according to the latest Scotland Buy-to-Let Index from Your Move, one of Scotland's largest lettings agent networks.

Average residential rents in Scotland dropped 0.7% in the month to March, the steepest monthly fall since the index began. This also represents the first monthly drop in rents witnessed since September 2015, when average rents were down 0.3% on August levels.

In absolute terms, this £4 drop between February and March takes the typical rent in Scotland down to £544 per month. Scottish rents have not been this low since May 2015.

This has also suppressed annual growth to just 1.1% in March - a significant downturn from 2.1% in the year to February 2016. This also takes the annual change to a thirteen-month low, on par with the 1.1% yearly increase recorded in February 2015.

Brian Moran, lettings director at Your Move Scotland, continues: "Those who

signed a new tenancy in March will be feeling confident they snapped up a competitive deal, and will be enjoying a little extra cash in their pockets at the end of every month. It's been a rare break for cover and it's unlikely to hang about for long as the Scottish rental market begins to gear up towards the annual autumnal peak. Tenants in big cities like Edinburgh haven't enjoyed the same reprieve at all, with the ratio of supply and demand still stacked greatly against them. Investment from landlords needs to follow the tune of the jobs market and economic activity.

"Affordability is the main warning light to watch out for on the dashboard, and with the frequency of arrears on the rise once again, this reminds us of the considerable obstacles ahead. With landlords now facing an additional 3% Stamp Duty on property purchases, and the Private Tenancies Bill passed through Scottish Parliament, we're entering unchartered territory. What we do know, is that if landlords hit the brakes and cause a roadblock of supply in the private rented sector, tenants will be the casualties paying higher rents in the longer term."

Monthly rents in March: by region

Rents by region

Rents fell across the majority of Scotland month- on-month in March, with only Edinburgh & the Lothians seeing a rent rise since February.

The steepest monthly drop in rents was experienced in Glasgow & Clyde, with the average rent in March 1.5% lower than in February. In cash terms, this represented an £8 drop, taking the average monthly rent to £544.

The Highlands & Islands saw a similarly steep 1.4% fall in rents since February, and rents in the East dropped 0.8% on a monthly basis. The South of Scotland saw a more modest 0.2% dip in rents month-on-month.

Edinburgh & the Lothians was the only region to buck this trend, with the average monthly rent climbing 0.2% (£1 in absolute terms) on February to reach a new peak price of £645 per month in March.

Taking a longer-term view, only two of the five regions of Scotland have seen rents fall on an annual basis.

Edinburgh & the Lothians are continuing to see record annual rent rises, up 8.5% year-on-year in March. Rent growth in the capital has been accelerating steadily since June 2015.

After this, rents in the South of Scotland have seen the next fastest annual rise, with rents up 3.2% since March 2015. The Highlands and Islands rounds off the top three, with a healthy 1.6% uptick in rents compared to a year ago.

But two regions have seen rents fall compared to a year earlier. Both Glasgow & Clyde and the East of Scotland have witnessed a 2.5% drop in rents across the twelve months to March 2016.

Tenant finances take a backward step

Despite the widespread monthly falls in rents in March, the proportion of late rent in Scotland has risen for the first time since October 2015.

Reversing the recent trend of improving tenant finances, tenant arrears rose to 11.3% of all rent due in March - up from a seven-month low of 10.9% in February. This also shows a lapse from a year previously, with the proportion of late rent in March 2015 just 8.6%.

Brian Moran comments: "March has seen a very unwelcome about-turn in the direction of tenant finances. Up until now Scottish tenants have been making good ground over the spring months, and paying down levels of late rent - but there's still a mountain to climb for many households.

"External factors and the wider economic climate obviously have a vital impact on tenants' bottom line and the delicate balancing act between monthly income and outgoings, but landlords on the ground can help keep a lid on affordability pressures too. Good management of buy-to-let properties and regular communication between landlords and their tenants is crucial to signpost any early concerns and avoid the likelihood of rental arrears. Tenants need properties they can afford, and landlords need tenants with a healthy grip on their household expenses, so it's about striking a fair deal for both."

Landlord returns distorted by LBTT

Headline annual returns for Scottish landlords have dipped to -6.3% in the year to March 2016. This is a considerable fall from a positive 2.1% return over the year to February, as a result of the distorted property price movements in Spring 2015 ahead of the implementation of the Land and Buildings Transaction Tax (LBTT). On an annual basis, this shows a drop from 19.2% in the twelve months to March 2015, which was buoyed up by strong capital accumulation as property prices rose sharply before the LBTT came into force, after an influx of high-value sales.

In absolute terms, this equates to the average Scottish landlord seeing a paper loss, before any mortgage payments or maintenance costs, of £11,300 in the past year - despite healthy rental income of £5,800 over twelve months. Property price stabilisation compared to last year has dragged the measure of capital accumulation down in March 2016, but existing landlords will have made a saving by investing before the additional 3% stamp duty was liable on buy-to-let property purchases.

If the house price recovery continues at the same pace as over the last three months, Scottish landlords can expect to see a total annual return of 1.3% over the next twelve months - or £2,100 in absolute terms.

As of March 2016, the average gross yield on a buy-to-let property in Scotland stands at 4.0%, consistent with the previous month. On an annual basis, gross yields have risen from 3.6% in March 2015.

Brian Moran concludes: "On the surface, the new LBTT - benefitting the vast majority of Scottish buyers - made it more expensive to become a landlord last Spring, with average property prices sent skyward after an onslaught of high